Global Investment Strategy

By John Praveen, Chief Investment Strategist of Prudential International Investments Advisers, LLC.* For Market Commentary Interviews Contact: Lisa Villareal, 973-367-2503/lisa.villareal@prudential.com Financial Market Outlook & Strategy: Stocks in Tug-of-War: Japan Uncertainty & Middle East Tensions vs. Solid GDP Growth, Strong Earnings & Liquidity. Bond Yields Fall on Increased Risk Aversion & Safe Haven Support John Praveen s Global Investment Strategy expects stock markets to experience increased volatility as Japan s earthquake and nuclear uncertainty, continued turmoil in the Middle East & North Africa, high oil prices, inflation worries and interest rate concerns collide with improving growth outlook, plenty of liquidity and strong earnings. After uninterrupted gains since last September, stock markets are being battered by a combination of negatives in Japan (earthquake and nuclear uncertainty), Middle East and North Africa (continued turmoil and the risk of even higher oil prices) and Emerging Markets & Europe (elevated inflation and interest rate hikes). However, stocks continue to be supported by strengthening GDP growth in the U.S. and Europe and continued solid growth in the emerging economies, plenty of liquidity and record low interest rates in the U.S., Japan, solid earnings outlook and reasonable valuations. These positive fundamentals should help stocks rebound from the current Japan & Middle East related sell-off. Bond yields have declined with increased risk aversion and safe haven appeal following Japan s earthquake and nuclear uncertainty combined with continued turmoil in the Middle East and North Africa. However, bond yields are likely to come under renewed pressure with strengthening GDP growth, rising inflationary pressures, continued rate hikes by emerging central bank and the ECB on the verge of the first rate hike. Among global stock markets, we have reduced the overweight in the U.S. and remain modest overweight in Emerging Markets. We have upgraded Japan to a neutral stance and downgraded Eurozone to a modest underweight. We remain underweight on U.K. Among global sectors, we remain overweight on Consumer Discretionary and Industrials. We remain modest overweight on Energy, Info Tech and Materials. We have downgraded Financials to a Neutral, and Consumer Staples to underweight. We remain underweight on Healthcare, Telecomm, and Utilities. Among global government bond markets, we remain overweight in Emerging Markets and Japanese JGBs, and neutral on U.S. Treasuries. We remain underweight on U.K. Gilts and Eurozone bonds. Market Outlook: Increased Market Volatility Japan Earthquake & Nuclear Uncertainty, Middle East & North Africa Tensions & Rising Oil vs. Improving GDP Growth, Solid Earnings & Liquidity Stocks: Strengthening GDP Growth, Solid Earnings & Liquidity vs. Japan Earthquake & Nuclear Uncertainty, Middle East Turmoil & Rising Oil Developed Markets rose 3.3% (in US$) in February after rising 2.2% in January while Emerging Market stocks fell -1% (US$) in February after declining -2.8% in January hit by rising inflation, central bank tightening, increased risk aversion and soaring oil prices. However, stock markets (both developed and emerging) fell sharply in mid-march as an earthquake and Tsunami rocked Japan. Uncertainty about the nuclear fallout from Japan s power plants hit by the earthquake led to panic selling and accelerated the decline, wiping out YTD gains. The global growth outlook remains solid with improving GDP growth in the U.S. and Europe while remaining solid in the emerging economies. Japan s Q1 rebound suffers a setback due to the earthquake and nuclear uncertainty. The interest rate and inflation outlook, however, is mixed. In the U.S. and Japan, the interest rate background remains favorable with low rates and plenty of liquidity, but interest rates are rising in the emerging economies and Eurozone appears to be on the verge of the first rate hike. Inflation remains elevated in the emerging economies and Europe, but remains benign in the U.S. and Japan. Oil is a big wild card for growth and inflation with continued Middle East tensions. Solid earnings outlook in H1 2011 with improving GDP growth. Earnings growth expected around 14% in Japan and U.S., 15% in Eurozone, and 20% in Emerging Markets. Strong Q4 earnings results in the major markets. Global equity trailing P/E multiples continue to rise in Q1 2011 as stocks post solid gains in recent months. However, the effect of the rise in prices was offset by stronger earnings growth. P/E Multiples still well below long-term averages. Summary: In the near-term, global equity markets are likely to experience increased volatility as Japan s earthquake and nuclear uncertainty, continued turmoil in the Middle East & North Africa, high oil prices, inflation worries and interest rate concerns collide with improving growth outlook, plenty of liquidity and strong earnings. Prudential International Investments Advisers, LLC. (PIIA) is a business of Prudential Financial, Inc., (PFI), which is not affiliated in any manner with Prudential plc, a company headquartered in the United Kingdom. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information. Page 1

Stocks are likely to remain under pressure from several negative factors in the near-term: 1) Economic and market uncertainty following Japan s earthquake and nuclear fallout; 2) Continued turmoil in the Middle East and North Africa and the risk for a further destabilizing surge in oil prices; 3) Emerging central banks continue to hike interest rates as headline inflation remains elevated. In addition, the recent rise in oil prices threatens to add to already elevated inflation; 4) The ECB has signaled that it is likely to raise rates, as early as April, with inflation remaining well above the ECB s 2% target. The Bank of England appears to be caught between elevated headline inflation and weak GDP growth; 5) Fresh after-shocks from the European debt crisis with downgrades of Peripheral sovereign debt. However, stocks remain supported by several positive fundamentals: 1) Strengthening GDP growth in the developed economies and continued solid growth in the emerging economies; 2) Plenty of liquidity and record low interest rates in the U.S., Japan; 3) Solid earnings outlook in H1 2011 with strong revenue growth from strengthening GDP growth. Strong earnings growth in Q4 2010. Low expectations for 2011 give scope for positive earnings surprises; 4) Valuations not very expensive. Current P/E multiples still well below long-term averages as the rise in equity P/E multiples due to price gains moderated by strong earnings growth. Looking ahead, we expect these positive fundamentals to help stocks rebound from the current Japan & Middle East related sell-off. We remain positive on the outlook for stocks beyond the near-term uncertainty. Bonds: Safe Haven Support for Bonds in the Near-term. Strengthening GDP & Rising Inflation Lift Yields Global government bond yields rose modestly in February as easing risk aversion and stock gains put upward pressure on bond yields while some weaker than expected macro data pulled yields lower. The J.P. Morgan Global Bond Index was flat in LC in February, up 0.5% in US$. In the near-term, increased risk aversion and safe haven appeal with continued turmoil in the Middle East and North Africa are likely to support bonds. However, bond yields are likely to remain under pressure with strengthening GDP growth in the U.S. and Europe, rising inflationary pressures, continued rate hikes by Emerging central banks and the ECB on the verge of the first rate hike. Looking ahead, U.S. Treasuries have a more neutral outlook in the near-term, but a negative outlook in the medium term. In the near-term, the continued turmoil in the Middle East and North Africa are likely to revive the safe haven appeal of Treasuries. However, Treasury yields face upward pressure with strengthening U.S. GDP growth, rising inflationary pressures, and reduced Japanese appetite for U.S. Treasuries. However, continued Fed purchase of Treasures under QE II should limit the rise in bond yields. The outlook for Eurozone bonds has turned negative with the ECB signaling a rate increase in Q2. Further, elevated inflation and solid GDP growth in Core Eurozone continue to put upward pressure on yields. However, with renewed pressure on Peripheral bonds is likely to fuel safe haven appeal for German and French bonds. The outlook for U.K. Gilts remains negative with Q1 GDP rebound and inflation remaining well above the BoE target. However, the BoE remains on hold and a weak GDP rebound could cap the rise in Gilt yields. The outlook for JGBs was relatively favorable until the Japanese earthquake. The reconstruction expenditure is likely to further increase Japan s government debt and put upward pressure on JGB yields. However, inflation remains in negative territory, while the BoJ has undertaken additional easing. Further, Japan s expected Q1 GDP rebound after the Q4 decline is likely to be in question. The near-term outlook for Emerging Market bonds is negative with elevated inflation and rate hikes. Continued turmoil in the Middle East & North Africa is still a negative. However, the medium-term outlook is positive as headline inflation appears close to a peak. While Emerging central banks are currently hiking rates, further rate hikes likely to be modest. These combined with solid EM growth are positive for EM debt. Investment Strategy: Stocks in Tug-of-War: Japan Uncertainty & Middle East Tensions vs. Solid GDP Growth, Strong Earnings & Liquidity. Bond Yields Fall on Increased Risk Aversion& Safe Haven Support Asset Allocation: Reduced Overweight Stocks; Remain Underweight Bonds; Add to Cash Global Equities: Reduce U.S. to Modest Overweight.; Remain Modest Overweight Emerging Markets; Upgrade Japan to Neutral; Downgrade Eurozone to Modest Underweight; Remain Underweight U.K. Global Bonds Remain Overweight Emerging Markets Remain Overweight Japan; Remain Neutral on U.S.; Remain Underweight U.K.; Downgrade Eurozone to Underweight. Global Sectors Overweight: Industrials, Consumer Discretionary; Modest Overweight: Energy, Materials, Info Tech. Neutral: Financials; Underweight: Consumer Staples, Healthcare, Telecomm, Utilities. Currencies Kingdom. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information. Page 2

ASSET ALLOCATION: Stocks vs. Bonds Stocks Reduced Overweight: We remain positive on the outlook for stocks. However, in the near-term, global equity markets are likely to experience increased volatility as the Japan earthquake and nuclear uncertainty, continued turmoil in the Middle East & North Africa, high oil prices, inflation worries and interest rate concerns offset the positive impact of improving growth outlook, plenty of liquidity and strong earnings. Bonds Remain Underweight: Bonds are likely to be supported in the near-term by increased risk aversion and safe haven appeal with continued turmoil in the Middle East and North Africa. However, bond yields are likely to remain under pressure with strengthening GDP growth, rising inflationary pressures, continued rate hikes by Emerging central banks and the ECB on the verge of the first rate hike. CURRENCIES The U.S. Dollar is expected to weaken against the euro and the yen. The euro is likely to strengthen as the ECB has signaled a rate increase in Q2 with inflation remaining well above the ECB s 2% target. EU agreement on a comprehensive package to help to contain the debt crisis is another positive for the euro. The yen is also likely to strengthen in the near-term as capital is repatriated following the earthquake. Further gains are expected for EM currencies due to stronger growth and central bank hikes. In addition, commodity currencies are expected to continue to appreciate in 2011 due solid demand. Global Equity Strategy U.S.: U.S. economy remains on track to strengthen in Q1 2011 with GDP growth expected around 3.5%. Growth expectations for Q1 have been scaled down as very severe winter storms appear to have taken a toll on consumption spending and construction activity. The Federal Reserve was on hold in March and is expected to remain on hold through most of 2011, despite the improvement in headline GDP growth in early 2011. This is because U.S. unemployment remains elevated and inflation remains well below Fed s implicit target of 2%. U.S. Q4 2010 earnings results were very impressive, around 37%, with over 70% of firms beating expectations. Earnings growth is expected around 14% in 2011 after 31% for 2010 driven by solid growth in revenues. Sales growth is expected to improve further, driven by further improvement in U.S. GDP growth and solid international demand, while strong productivity and input costs control are expected to keep profit margins in tact. Reduce to Modest Overweight. Emerging Markets (EM): GDP growth remains solid in the emerging economies driven by robust domestic demand and strong capital flows, especially in Asia. EM Asia is expected to post around 8% growth while GDP growth in EM Europe and EM LatAm is expected around 4%. However, rising food prices, elevated commodity prices and strong demand are keeping inflation elevated prompting emerging central banks to hike rates. However, the rate hikes are likely to be modest to prevent strong currency appreciation, with developed central banks on hold through 2011. The earnings outlook remains strong, supported by strong domestic demand and solid exports. EM equity valuation remains attractive. Middle East tensions, EM central bank tightening and currency appreciation are near-term negatives for EM stocks. Remain Modest Overweight. Japan: The recent market sell-off following the earthquake, Tsumani and nuclear uncertainty have improved valuations. BoJ eases further and additional fiscal stimulus likely. While the earthquake is likely to take a toll on growth in the near-term, the reconstruction spending is likely to boost growth in the medium-term. The BoJ increased the size of its asset purchase program to 40tn at its March meeting in response to the earthquake. Japanese earnings growth is expected around 14% in 2011 after 21% in 2010. Profits have risen strongly among Japanese Industrials as they have benefitted from high levels of capital spending by massive Chinese demand. Upgrade to Neutral. Eurozone: Eurozone Q4 GDP growth slowed to 1.1% QoQ annualized pace after rising 1.4% in Q3 but is expected to rebound to around 2% in Q1 with solid growth in core, especially Germany and France. Eurozone headline HICP inflation remains elevated at 2.4% YoY in February (flash) from 2.2% in December. This has prompted ECB President Trichet to signal a rate increase, possibly at the next meeting. Eurozone Q4 earnings are coming out mixed with less than 50% of companies beating expectations. Fresh after-shocks from the European debt crisis with downgrades of Peripheral sovereign debt are a negative. However, Eurozone leaders agreed on the key elements of a comprehensive package to help contain the debt crisis. Downgrade to Modest Underweight. U.K.: U.K. GDP growth is on track to rebound to around 1.8% in Q1 from the Q4 decline. However, other adverse effects, like the impact of the latest VAT hike, could limit the size of the bounce. The BoE held rates at 0.5% at the March meeting and maintained their asset purchase program at 200bn. Rates have been at this level since February 2009. The BoE is expected to remain on hold through at least H1 2011. The earnings outlook for U.K. stocks remains solid while valuations are neutral. Remain Underweight. Kingdom. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information. Page 3

Global Bond Strategy Emerging Markets: The near-term outlook for Emerging Market bonds is negative with elevated inflation and rate hikes. Continued tensions in the Middle East & North Africa still a negative. However, the medium-term outlook is positive as headline inflation appears close to a peak. While Emerging central banks are currently hiking rates, further rate hikes likely to be modest. These combined with solid EM growth are positive for EM debt. Remain Overweight. Japan: The outlook for JGBs was relatively favorable until the earth quake on March 11th. The earthquake reconstruction expenditure is likely to further increase Japan s government debt and put upward pressure on JGB yields. The Japanese economy was on track to rebound in Q1 to around 2.5% GDP growth with solid momentum in investment spending and exports. However, the earthquake and tsunami is likely to depress growth in the near-term through disruptions to production, though reconstruction expenditure is likely to boost GDP growth in the medium-term. Further, inflation remains in negative territory, while the BoJ has undertaken additional easing in the wake of the natural disaster. Japanese headline inflation remains low despite being pressured higher by soaring energy and food prices. Nationwide headline price inflation remained flat YoY in January after rising 0.1% in November. The central bank pumped 15tn ($183bn) into money markets to assure financial stability amid a plunge in stocks and surge in credit risk following the devastating earthquake. Remain Overweight JGBs. U.S.: U.S. Treasury yields have a more neutral outlook in the near-term, but a negative outlook in the medium term. In the near-term, the continued turmoil in the Middle East and North Africa are likely to revive the safe haven appeal of Treasuries. However, Treasury yields face upward pressure with strengthening U.S. GDP growth, rising inflationary pressures, and reduced Japanese appetite for U.S. Treasuries. The U.S. economy remains on track to strengthen with Q1 GDP growth expected around 3.5%, up from 2.8% in Q4. U.S. headline inflation rose to 1.7% YoY in January after 1.4% in December. On a monthly basis, headline inflation rose 0.4% MoM. The Federal Reserve left rate policy unchanged in March and is expected to remain on hold through most of 2011, despite the improvement in headline GDP growth in late 2010 and into 2011. Continued Fed purchase of Treasures under QE II should limit the rise in bond yields. Remain Neutral U.S. Treasuries. Eurozone: The outlook for Eurozone bonds has turned negative with the ECB signaling a rate increase in Q2 with inflation well above ECB target. The ECB left rates on hold at 1% in March. However, in the Q&A following the March meeting, President Trichet hinted that an increase in interest rates is possible at the next meeting given the increase in upside risks to inflation. Eurozone GDP growth is on track to rebound to around 2% with solid growth in core and weakness in the periphery. Domestic demand is expected to continue to recover in Q1 with strong consumer confidence and falling unemployment while Eurozone business confidence continued to improve in February. Eurozone headline HICP inflation remains elevated at 2.4% YoY in March. However, renewed pressure on Peripheral bonds is likely to fuel safe haven appeal for German and French bonds. Downgrade Eurozone Bonds to Underweight. U.K.: The outlook for U.K. Gilts remains negative with Q1 GDP rebound and inflation remaining well above the BoE target. Inflation is one of the most significant negatives for the U.K., with the highest inflation rate among the major economies. U.K. headline inflation increased to 4% YoY in January after accelerating to 3.7% in December from 3.2% in November. U.K. GDP growth is on track to rebound in Q1 after the Q4 decline. However, other adverse effects, like the impact of the latest VAT hike, could limit the size of the bounce. The BoE remaining on hold and a weak GDP rebound could cap the rise in Gilt yields. Remain Underweight U.K. Gilts. Global Sector Strategy Our global sector model ranks sectors on a comparative basis using macro factors, valuation, earnings and risk measures. Consumer Discretionary Consumer demand remains supported by improving labor market in developed economies. However, rising gasoline prices are a negative. EM consumption remains solid driven by strong employment and government spending. Strong earnings trends driven by Autos and Retailing. Sector earnings growth and valuations remain attractive. Remain Overweight. Industrials - Business confidence has strengthened further year to date and points to strong industrial activity. IP growth and Machinery orders remain solid in key markets. Potential for further upward earnings revisions are a positive. Earnings expected to rise a strong 19% in 2011. Sector valuations are modestly attractive. Remain Overweight. Energy - Oil prices have surged to around $100 due to rising tensions in the Middle East and solid demand from emerging economies. Asset purchase programs by Fed and BoJ continue to support the sector. Energy earnings are expected to grow 16% in 2011. European Energy sector valuations are cheaper relative to that of U.S. Remain Modest Overweight. Information Technology Demand remains solid for tech products. Strong business confidence likely to result in strong Tech infrastructure spending and upgrades. Telecomm equipment demand and productivity improvements likely to remain solid. U.S. Tech earnings results came out stronger than expected. Earnings expected to rise 15% in 2011. Remain Modest Overweight. Materials - Materials are likely to benefit from the solid rise in commodity prices year to date. Continued solid demand from emerging economies remains supportive of the sector. However, concerns about EM rate hikes is a negative. Sector earnings are expected to post strong growth of around 39% in 2011. Agricultural prices remain firm due to supply constraints. Remain Modest Overweight. Financials - Financials likely to benefit from low rates and QE, and improvement in loan growth and lower credit losses as GDP growth strengthens. However, struggling U.S. housing market a negative for U.S. financials, while the ongoing Eurozone debt crisis is a big risk for Eurozone banks. Relative valuations are expensive. Sector earnings expected to rise 19% in 2011. Downgrade to Neutral. Kingdom. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information. Page 4

Consumer Staples - Staples are less preferred by investors currently due to its defensive nature. However, there is interest from investors who are seeking higher dividend yields. Staples earnings are expected to rise 11% in 2011. The rise in input costs including energy and commodity prices are likely to negatively impact margins. Downgrade to Underweight. Healthcare - Defensive nature of the sector has led to less investor interest in the sector. However, sector valuations have improved given their underperformance. Earnings are expected to rise just 7% in 2011 as sales growth remains weak. Further, headline risks especially in U.S. are a negative. Biotech stocks are likely to benefit from the increase in M&A activity Remain Underweight. Telecomm Services - Easing risk aversion is a negative for the sector. While demand for Telecomm services is increasing due to increased use of smart phones, pricing still remains weak. Telecomms earnings are expected to rise just 5% in 2011. Telecomms have a high dividend yield and the low Price/Cash Earnings multiple. Remain Underweight. Utilities - Easing risk aversion is a negative for Utilities. The sector is expected to see an earnings growth of 2% in 2011 after a -2% decline in 2010. Sectors valuations are attractive after lagging the overall market in 2010 and during the strong rally in 2009. Utilities have a very high dividend yield and the low forward P/E multiple. Remain Underweight. Strategy Summary: Asset Allocation: Reduced Overweight Stocks; Remain Underweight Bonds; Add to Cash Global Equities: Global Bonds Reduce U.S. to Modest Overweight.; Remain Modest Overweight Emerging Markets; Upgrade Japan to Neutral; Downgrade Eurozone to Modest Underweight; Remain Underweight U.K. Remain Overweight Emerging Markets Remain Overweight Japan; Remain Neutral on U.S.; Remain Underweight U.K.; Downgrade Eurozone to Underweight. Global Sectors Currencies Overweight: Industrials, Consumer Discretionary; Modest Overweight: Energy, Materials, Info Tech. Neutral: Financials; Underweight: Consumer Staples, Healthcare, Telecomm, Utilities. Disclosures: Prudential International Investments Advisers, LLC. (PIIA), a Prudential Financial, Inc. (PFI) company, is an investment adviser registered with the Securities and Exchange Commission of the United States. Pramerica is a trade name used by PFI and its affiliated companies in select countries outside of the United States. PFI, a company incorporated and with its principal place of business in the United States of America is not affiliated in any manner with Prudential plc, a company headquartered in the United Kingdom. The commentary presented is for informational purposes only, and is not intended as investment advice. This material has been prepared by PIIA on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information. All opinions and views constitute judgments of PIIA as of the date of this writing, and are subject to change at any time without notice. There can be no assurance that any forecast made herein will be realized. Distribution of this information to any person other than the person to whom it was originally delivered and to such person s advisers is unauthorized and no part of this material may be reproduced or distributed further without the written approval of PIIA. These materials are not intended for distribution to, or use by, any person in any jurisdiction where such distribution would be contrary to local law or regulation. The companies, securities, sectors and/or markets referenced herein are included solely for illustrative purposes to highlight the economic trends, conditions, and the investment process, but may or may not be held by accounts actually managed by PIIA. The strategies and asset allocations discussed do not refer to any service or product offered by PIIA or by its affiliates The global asset and strategy allocation models presented are hypothetical allocation models shown for illustrative purposes only, and do not necessarily reflect the management of any actual account. Following the allocation recommendations presented will not necessarily result in profitable investments. Past performance is not an assurance of future results. Nothing herein should be viewed as investment advice to adopt any investment strategy, nor should it be considered an offer to provide investment advisory or other allocation services. The Rock symbol is a service mark of PFI and its related entities, registered in many jurisdictions worldwide. Copyright 2011Prudential, the Rock logo Kingdom. For Informational Use Only. Not Intended As Investment Advice. See Disclosures on the last page for important information. Page 5